Billions Of Dollars In U.S. Construction Loans Have Been Affected By The Coronavirus

The coronavirus pandemic has disrupted at least $3.9B in U.S. construction loans, as cities and states continue to implement a patchwork of social distancing policies and stay-at-home orders.

Built Technologies Director of CRE Strategy Jim Fraser told Bisnow that about $3.9B, or 22%, of U.S. construction loans managed via the company’s loan management platform are based in a location with some kind of construction suspension order in place.

“Different cities and different states are doing things completely different — it's random, it’s not consistent nationwide,” Fraser said.

The software created by Built Technologies is used by some lenders for the administration of construction loans. In response to the changing conditions caused by the coronavirus, the company recently added a feature that shows users where suspension orders have been implemented.

As the pace of construction projects falls behind schedule, loans automatically become distressed. Typically, the lender would have to downgrade the loan. But under provisions in the CARES Act, lenders have the flexibility to restructure a construction loan without classifying it as troubled debt restructuring.

Lenders now face the challenge of renegotiating tens of thousands of complex construction loans around the country.

Construction loans operate differently from a typical personal loan. Instead of a lump-sum loan, a bank or lender will continuously provide money as the project progresses. There is higher risk associated with a construction loan, because if the borrower defaults on payments, there is no completed building or collateral for the bank to seize.

The successful progression of a construction project depends on a wide variety of factors, including inspections, permits, taxes and construction personnel.

Some cities have been able to continue construction work site activity, but have seen a slowdown in the inspection and permitting process. Other cities are only allowing construction on certain essential projects related to sectors like healthcare or infrastructure. Some cities, including Boston, have ceased construction activity completely.

Fraser noted that the data generated from the Built Technologies platform doesn’t paint the full national picture, because it only includes data from the 119 lenders that use its technology.

“We have a large group of lenders that are in the northwest part of the U.S., so we'll report a higher concentration of data from our constituent clients who are active in Oregon and Washington,” Fraser said.

However, Fraser said that the company’s data could be a “canary in the coal mine” for states that have a high concentration of loan activity via the platform.

Construction disruption hot spots around the U.S. include Louisiana, the Northeast, Northern California and most of the Oregon and Washington markets, according to the Built Technologies data.

Fraser’s biggest concern is what lies ahead for lenders, particularly as the delayed economic impacts of the pandemic begin to emerge.

“My biggest worry is that the earthquake of the event of March and April won't generate a tsunami on the shores of the real estate portfolios for another quarter or two,” Fraser said.